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Seismic effects of the bankruptcy reform

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  • Donald P. Morgan
  • Benjamin Iverson
  • Matthew Botsch

Abstract

We argue that the 2005 bankruptcy abuse reform (BAR) contributed to the surge in subprime foreclosures that followed its passage. Before BAR, distressed mortgagors could free up income by filing bankruptcy and having their unsecured debts discharged. BAR blocks that maneuver for better-off filers by way of a means test. We identify the effects of BAR using state home equity bankruptcy exemptions; filers in low-exemption states were not very protected before BAR, so they would be less affected by the reform. Difference-in-difference regressions confirm four predictions implied by that identification strategy. Our findings add to research trying to explain the surge in subprime foreclosures and to a broader literature on household bankruptcy demand and credit supply.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 358.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:358

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Related research

Keywords: Bankruptcy ; Banking law ; Subprime mortgage ; Foreclosure ; Financial crises;

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References

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  1. Dell’Ariccia, G. & Igan, D. & Laeven, L., 2009. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," Discussion Paper 2009-46 S, Tilburg University, Center for Economic Research.
  2. Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports 318, Federal Reserve Bank of New York.
  3. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
  4. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
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Cited by:
  1. Meta Brown & Andrew Haughwout & Donghoon Lee & Wilbert van der Klaauw, 2010. "The financial crisis at the kitchen table: trends in household debt and credit," Staff Reports 480, Federal Reserve Bank of New York.
  2. John Y. Campbell & Stefano Giglio & Parag Pathak, 2011. "Forced Sales and House Prices," American Economic Review, American Economic Association, vol. 101(5), pages 2108-31, August.
  3. Garrett, Thomas A. & Wall, Howard J., 2010. "Personal-bankruptcy cycles," MPRA Paper 42740, University Library of Munich, Germany.
  4. Chintal Desai & Gregory Elliehausen & Jevgenijs Steinbuks, 2013. "Effects of Bankruptcy Exemptions and Foreclosure Laws on Mortgage Default and Foreclosure Rates," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 391-415, October.
  5. Wenli Li & Michelle J. White, 2009. "Mortgage Default, Foreclosure, and Bankruptcy," NBER Working Papers 15472, National Bureau of Economic Research, Inc.
  6. Michelle J. White, 2008. "Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage Crisis," NBER Working Papers 14549, National Bureau of Economic Research, Inc.

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